Costco Earnings Could Set The Retail Tone This Quarter (COST)

Costco Wholesale Corp. (NASDAQ:COST) reports earnings Wednesday Pre-Market with First Call looking for $0.83 EPS on $20.7 Billion revenues.  We already saw the net sales estimated one-month ago at $20.06 Billion, so with weak numbers coming out from many other retailers it is hard to look for much upside.  Since this marks the fourth quarter and year-end, this may give the first look at the long-term model from the company with 2008 guidance (estimates are $2.91 EPS & $71.6 Billion revenues; up an estimated 14% on EPS and 10% on revenues).

Costco put in new highs over the summer just over $65.50 and after themalaise shares hit as low as about $57.00 before coming back to $63.31as of Tuesday’s close (down 0.6% on the day).  Would it be bittersweetif a retailer that already gave much of the data were able to challengenew all-time highs when the retail environment is not looking solid?

The average analyst target is just over $63.00, in-line with currentprices.  With a forward 2008 P/E of 21.75 on projected 10% revenue and14% earnings growth, this seems fairly valued unless the companymanages another "wow!" quarter at a time that peers are seeming softand the retail associations are scaling back holiday and Q4expectations for the sector.  Options traders appear to be braced for amove of $2.00 in either direction.

We won’t get too bold here because every time this has seen a majorpullback it has been an opportunity for those who missed owning Costcoshares before.  Who knows, if things aren’t that great maybe they’llconsider asking if you’d like to buy a share of stock with yourpurchase.

Costco’s stock has not really been tied to the other big-box retailers and discounters because of its higher income shoppers and because of its higher-end focus.  But if it can pull a rabbit out of the hat, Wall Street may go easy on some of the other retailers this earnings season.

Jon C. Ogg
October 10, 2007